Chair’s Column: Exploring NFTs and Divorce

Hello Family Law Section! My name is Stephanie Tang, and I’m a Chicago family law practitioner turned assistant professor at Baylor Law School and your 2022-2023 chair for the ISBA’s Family Law Section Council. This year for my chair’s columns, I want to focus on less often explored areas of family law and intersections between family law and other areas of law. 

Before I launch into that, I want to take the time to thank our outgoing chair, Susan Rogaliner, for her exceptional mentorship and service to the Family Law Section Council. She taught me how to manage Zoom meetings like a pro and spearheaded many new initiatives and legislation. I also wanted to take time to recognize our wonderful subcommittee chairs for their hard work this past year as always. One project the section council is particularly proud of from this past year is the new Family Law Toolkit, available now. This toolkit is designed to be a handy practitioner’s guide to all things family law, with sections including language to include in pleadings, questions to ask in court, and practice tips. I am looking forward to working with Wes Gozia, our incoming vice chair, and Jessica Patchik, our incoming secretary, on making this another great year for the section council! 

For this month’s column, I wanted to kick things off by writing about the emerging virtual currency, non-fungible tokens (“NFTs” or “nifties”), and some considerations with divorce. NFTs are effectively snippets of code embedded with metadata, similar to a photo or a Word document, that defines its characteristics. For example, one popular NFT, Cryptokitties, allows investors to pick kitties based on their color, mouth and eye shape, and pattern.
    
NFTs have gained increasing popularity over the past few years, now even getting picked up by the long-established auction houses, Sotheby’s and Christie’s in their auctions. In March 2021, Christie’s sold the highest selling NFT for 69 million dollars. Sotheby’s also reaped the benefits of NFTs by hosting its highest sales year in its 277-year history in 2021 thanks to NFTs. On the other hand, NFT fraud also rose with the popularity of NFTs, with many companies engaging in “rug pull” fraud schemes where a NFT creator raises capital for an alleged NFT and then “ghosts” the investors. NFTs are commonly thought of as digital art, but can be extended to website domains or even real estate. So, what do divorce attorneys and judges need to know about this new class of assets?

NFTs are traded on the Ethereum blockchain (ETH for short). This means that in order to purchase an NFT, an investor needs to acquire a certain amount of ETH in their virtual wallet. Think of ETH just like any other type of currency, but instead, it is virtual. You likely have heard of Bitcoin (BTC), which is another cryptocurrency. Similarly, think of your virtual wallet just like your physical wallet, but it exists online. Investors may either purchase an existing NFT (that already has defined, visible characteristics) or if they’re trying to invest early, they can purchase what is known as a “mintpass.” 
    
Here’s a very rough overview of how mintpasses work: For a digital art NFT, the NFT creator first designs what the artwork will look like and advertises this on social media, giving investors the chance to get on what’s known as a “whitelist.” Think of a whitelist like a VIP list, that grants you access to a private sale where you can purchase a mintpass that will guarantee you an NFT once the creator eventually releases it. The mintpass goes into the investor’s virtual wallet. Once the creator is ready to release it (which could be months in the future), they will announce the NFT’s release again usually via social media, and the investor can go into their wallet and refresh it to see the final NFT. 

So how does an attorney get information about an NFT? Like all other assets, you will primarily rely on your formal discovery methods, particularly Notices to Produce and Matrimonial Interrogatories. You should add a specific request to produce and interrogatory regarding virtual currency holdings, particularly where your client has identified their spouse as a virtual currency investor. Formal discovery will allow you to obtain what’s called a “wallet address” for the investor spouse that you can use to trace the history of the NFT on an NFT marketplace like OpenSea, Known Origin, or Rarible. This includes any dates of transaction with the NFT to determine whether it is nonmarital or marital property. If the investor has hundreds or thousands of holdings, it is likely worthwhile to explore hiring an expert to help with this tracing analysis if funds allow. You can also use the marketplaces to view how much the NFT is currently valued at. Note that these valuations are very volatile so it is important to keep an eye on values during the pendency of your case. 

A spouse can either sell an NFT or transfer it to their spouse (if their spouse has a virtual wallet to receive it). When drafting language for a marital settlement agreement/final judgment regarding the sale of an NFT, think about all of the considerations you go through when drafting a provision regarding sale of real estate. You need to include: (1) when the NFT must be listed for sale on an NFT marketplace and if the spouse should provide proof of same; (2) the price of the sale), and (3) how/when the proceeds received will be distributed. Attorneys can look at other similar NFTs on the open marketplaces or Rarity.Tools, which will let you know what NFTs with similar attributes will sell for. That being said, like is often the case with real estate, NFTs can sell well below their floor price, or maybe not at all. To protect the parties from repeatedly coming back to court in these circumstances, it is advisable to provide deadlines for re-listing an NFT for sale and mandate the seller to list the NFT at increasingly discounted rates until sold to reduce the parties’ entanglement with each other. Because of lack of liquidity and uncertain ability to sell, it is also advisable to separate NFTs on your balance sheet and divide the remainder of the estate separate and apart from the NFT rather than trying to ascertain a value to offset with another asset in the estate.

Finally, for spouses who have created NFTs, you will want to do some additional discovery on whether they are receiving royalty income from the NFT. Under In re Marriage of Heinze, 257 Ill. App. 3d 782 (3d Dist. 1994), you can make an argument that the non-creator spouse should be entitled to a percentage of the NFT royalties received.
    
For more information about cryptocurrency, NFTs, and divorce, check out my upcoming article in the Penn State Law Review, the webcast recording of my CLE with Wes Cowell on the topic from June 23, 2022, and my prior article on cryptocurrency and divorce with Janice Boback published in the Illinois Bar Journal.